Smart metering could topple big six

03/02/2017

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The pressure of capital investment in the smart meter rollout, coupled with increased competition from new market entrants, could bring an end to the dominance of energy incumbents, according to a new report.

Large incumbents are “paying to build a future they will struggle to profit from unless they are prepared to radically rethink how they do business,” says a report on the UK smart meter rollout, which will be published by consultancy EY next week.

The document claims that a combination of regulatory compliance programmes, added to the demands of the smart meter rollout are “sapping investment into future growth opportunities” at the big six, who carry the vast majority of the responsibility for smart meter installation.

The risk this poses to their businesses is “massive” EY’s Rob Doepel, one of the report's authors, told Utility Week.

“We’re saying to the market that it must roll out this programme which costs £11bn – though we’ve said before that we think it could be a lot more than that,” he said.

“At the same time suppliers are being hammered on price and competitiveness We want them to reduce their price – reduce costs to customers – but also to make a massive investment in an incredibly complex programme that no other country in the world has chosen to do in the way that we have chosen – a way which is inherently expensive.”

Doepel continued: “We’ve asked them to make that ridiculous investment, reduce costs for consumers, and innovate around products – for example, bundling and connected home. I am struggling to square the circle. Something has to give.”

Doepel said he can clearly see a future in which the investment demands of the smart meter rollout leads to “all the capex investment being sucked up by the deployment programme and there is nothing left for the innovation.”

He added that foreign owned utilities in particular may struggle to deliver the necessary investment in smart metering because their parent companies are frustrated by the unusual structure of the UK smart meter rollout, compared to the network-led approach which has been the norm elsewhere, and cannot see the benefit of investing in it.

“Foreign owners are looking in and saying it is too expensive, that they can’t see the business payback,” said Doepel. “The business case for smart meters is a UK PLC business case, not an individual supplier business case.

“If you’re a foreign owner – or indeed any private equity owner or good business person – you’re going to look at it and say ‘why would I make that investment?’”

EY’s report, which draws parallels between the challenges currently being faced by energy incumbents and those which led to the demise of dominant telecoms companies after the rollout of fibre broadband, offers five points of advice for both big six firms and challenger suppliers.

Amongst these is a suggestion that larger firms, for whom the burden of smart meter installation is highest, need to significantly improve the efficiency with which their programmes are being executed.

“Many smart programmes are still not being run with the discipline of a £1bn+ capital programme,” states the report. “Installation costs are not universally measured and tracked, nor are key cost drivers measured accurately enough to provide certainty on total cost of deployment.”

EY also urges suppliers think today about their post-rollout business models and not to become bogged down in the challenge of installation – despite the strain this is putting on capital budgets and management time today.

Finally, Doepel also told Utility Week that it is time for government to reconsider the 2020 rollout deadline.

“Everyone knows it is unachievable,” he said, “but there is a game of chicken [between industry and government] as to who is going to blink first.”

In the meantime, the deadline is “driving a huge amount of cost and it is driving an awful lot of poor decision making,” Doepel insisted. He added that the process of negotiating the UK’s exit from the EU may well give a timely opportunity to review the smart meter deadline and create a more “UK-centric approach”.

EY’s report, “As smart meters get smarter, who gets the power?” will be published during the week commencing 6 February.